The asset management industry is on a roll. The money it manages globally has doubled in the past decade to $87 trillion. That’s a big figure – roughly the equivalent of a year’s global GDP – but one that is likely to be dwarfed by the industry’s projected growth in the coming decades.

Haldane: ‘Capital that can afford to be patient should be patient’

The buyside is moving into areas that were traditionally the preserve of banks and benefiting from huge demographic shifts. The world’s population is getting bigger, older and richer – the holy trinity for fund flows. By some estimates, the industry could be managing $100 trillion by 2020 (according to PricewaterhouseCoopers) and $400 trillion by 2050 (according to a back-of-the-envelope calculation by the Bank of England). We could be on the cusp of a golden age for investment.

Which is all to the good. Except – as Spiderman’s uncle says – with great power, comes great responsibility.

International regulators including the Financial Stability Board are looking at whether non-bank, non-insurer global financial institutions (it might as well just spit it out and say “large asset managers”) pose risks to the economy. One suggestion is that funds with more than $100 billion in net assets under management be designated as systemically important and, like the biggest banks, subjected to more stringent supervision.

The industry is pushing back. Its complaint is two-fold. Firstly, looking at the size of funds is just way too simplistic. Secondly, regulators appear to be thinking about asset managers as if they were banks, which they aren’t.

And asset managers are right: they’re not banks. Funds are very unlikely to fail in a disorderly manner (they just lose money), to require bailouts (if they lose too much money, they’ll simply shut), or to require capital (funds absorb their own losses). And different asset managers are not particularly interlinked with each other in the way that banks are.

The buyside has conceded that it is worth keeping an eye on leverage. But the 14 US funds with more than $100 billion in assets under management have an average leverage ratio of just 1.04, according to trade body the Investment Company Institute. So, to all intents and purposes, that’s irrelevant too.

Overall, the asset management industry’s message to regulators is: move along folks, nothing to see here.

Which is interesting. It shows that the asset management industry, while claiming that it doesn’t want to be treated like the banks, is happy to adopt exactly the same lobbying tactics as the sellside: wait for the regulators to come up with a proposal and then pick it apart.

Different industry, different risks

They may not have noticed, but that isn’t working out too well for the banks.

So let’s pretend the asset management industry wanted to start proactively engaging with the additional scrutiny that is inevitably heading its way. How should the newly merged Investment Management Association and the investment arm of the Association of British Insurers, for example, go about that?

It should start with first principles: what does the world want of its growing pool of savings?

We want it to buy when prices dip and sell when valuations get overheated, thus helping stabilise the markets. We want the strongest investors to take on the most risk and the weakest to take on the least. We want capital that will invest in the global economy with a view to future decades.

And, in all these regards, the asset management industry is looking less and less like the one that we want and need.

The issue – to paraphrase a recent speech by Andrew Haldane, the executive director of financial stability at the Bank of England – is not so much that the asset management industry is getting bigger but that it is changing how it invests and what it invests in. It is managing an ever-greater proportion of funds passively and investing an ever-smaller proportion of savings in equities.

This is troubling because passive investing has been shown to result in herding behaviour and even the longest-dated bond cannot compare for longevity with equity, which is perpetual. We are, in other words, hard-wiring short-termism into the financial system.

The trends are interrelated and exacerbated by human behaviour and regulation. The average investor is risk-averse and prone to live in the moment. Rather than counter these unhelpful tendencies, accountancy rules and regulations have encouraged pension schemes and insurers to mark their assets to market and systematically de-risk their portfolios.

But the asset management industry doesn’t do enough to improve the situation either. It endlessly launches faddish products that cater to human foibles rather than trying to correct for them, it perpetuates complicated fee structures that encourage investors towards passive products and erode long-term performance, and it forgets that the most precious commodity that investors have is not their money but the time over which they invest that money.

Investment risk is indeed different from banking risk. There is too great a focus by everyone – investors, asset managers and regulators – on potential losses rather than on what might be gained if our collective savings were invested differently. In this regard perhaps the biggest risk posed by the asset management industry is an opportunity cost.

In his speech, Haldane said: “Capital that can afford to be patient should be patient.”

There is too much skittish and flighty money in the world. The asset management industry needs to encourage its clients – through education and the design of its products – to keep calm and carry on investing for the long term.

If it doesn’t then the approaching golden age of investment might turn out to be pure iron pyrite.